Pay for performance and financial incentives
- 2. MONEY’S ROLE IN MOTIVATION • Use of financial incentives was suggested by Frederick Taylor • His major three contributions were: 1. Formulating a precise output standard for each job. 2. He spearheaded ‘scientific management movement’. 3. Popularized use of incentives to reward employees.
- 3. INCENTIVE PAY TERMINOLOGY Generally, two terms are used synonymously with incentive plan : 1. Traditionally, the term pay-for-performance plan is used. 2. Variable pay is a more specific term where some measure of performance is tied to the firm’s well being. In India, the terms bonus or performance bonus is used.
- 4. LINKING STRATEGY, PERFORMANCE AND INCENTIVE PAY • Logical as it seems, linking pay with performance is easier said than done. • Most companies believed it had only limited success. • Only 28% of U.S. workers said that their companies’ incentive plan motivated them. Some of the reasons why incentive plans fail to motivate: I. Incentivizing the wrong behavior. II. Many employers ignore the fact that incentives may motivate some people but not others.
- 5. MOTIVATIONAL THEORIES AND INCENTIVE PLANS Frederick Herzberg: • Laid emphasis on providing challenge and recognition through the job. • This would help satisfy “higher level” needs. • Higher level needs are relatively insatiable according to Herzberg. • Satisfying “lower level” needs would only keep the worker from becoming dissatisfied.
- 6. DEMOTIVATORS AND EDWARD DECI • Deci found that extrinsic rewards may backfire. • Extrinsic rewards may detract from intrinsic motivation. • One should be careful while designing incentive pay for highly motivated employees.
- 7. VICTOR VROOM’S EXPECTANCY THEORY Victor Vroom stated that a person’s motivation depends on the following: Expectancy that effort will lead to performance. Instrumentality- Connection between successful performance and obtaining rewards. Valence which represents perceived value the person attaches to reward. Motivation = E*I*V
- 8. MANAGEMENT IMPLICATIONS OF EXPECTANCY THEORY • First, managers must ensure that employees have the skills to do the job and believe they can do the job. • Managers must make employees know that good performance will be instrumental to getting the rewards. • Manager should make sure reward is of value to the employee.
- 9. BEHAVIOUR MODIFICATION/REINFORCEMENT • Managers apply B.F. Skinner’s principles by using behavior modification. • Behavior modification is the changing of behavior through rewards or punishment. Two main principles behind it are: 1. Behaviour that leads to a positive consequence tends to repeated 2. Behavior that leads to a negative consequence tends not to be repeated
- 10. INDIVIDUAL EMPLOYEE INCENTIVE & RECOGNITION PROGRAMS
- 11. INDIVIDUAL EMPLOYEE INCENTIVE PLANS 1. Piecework : - Earnings are tied directly to what the worker produces. • Types • Straight piecework plan - An employee is paid based on what he has produced - No guaranteed minimum wage • Standard hour plan - Worker gets a pay premium equal to the percentage by which his or her performance exceeds the standard
- 12. PIECEWORK - ADVANTAGES & DISADVANTAGES Advantages: Simple to calculate Easily understood by employees Appear equitable in principles Powerful incentive value Disadvantages: Unsavory reputation Production standard may become tied inseparably in worker’s mind Workers may become less focused on quality Workers may resist switching jobs Attempts to introduce innovative processes may fail Equipment maintenance may tend to decline
- 13. 2. MERIT PAY • The firm awards an increase to an individual’s salary based on individual performance • It is different from a Bonus Demerits The pay raises across the board may be without regard to individual merit It may backfire due to unfair appraisal process based on which merit decisions are taken How can these be resolved? Establish effective appraisal procedures Ensure managers do tie merit pay awards to performance
- 14. MERIT PAY OPTIONS • Lump – sum merit raises - This awards merit raises in a lump sum once a year - This raise is not part of an employee’s monthly earnings Two potential benefits - The merit raise is not baked into an employee’s salary - More dramatic motivators than traditional merit increase • Ties merit awards to both individual and organizational performance
- 15. 3. DIVERSITY COUNTS • Women typically earn only about 85% as much as men • Women may not have access to the same bonus plans as men do • Affect on female employees need to be considered • In designing pay components • Any incentive plan’s affect
- 16. INCENTIVES FOR PROFESSIONAL EMPLOYEES • Firms usually pay professionals well • Professionals produce high-caliber work • Firms work harder to maintain competitive incentives for professionals Dual – Career Ladder - Another way to manage professional’s pay - Employers institute this such as one for managers and another for engineers - Same compensation levels for both tracks - Professionals are offered opportunities to earn higher without switching to management
- 17. NONFINANCIAL & RECOGNITION – BASED AWARDS • Recognition programs - Formal programs • Social Recognition programs - Informal in nature - Manager – employee exchanges such as praise, approval or expressions of appreciation for a job well done • Performance Feedback - To provide quantitative or qualitative information on task performance
- 18. 4. SOCIAL MEDIA & HR • Various apps let employees showcase their awards, contributions and praise from workers • Some apps facilitate employees praising each other • Some apps let users post the positive feedback they receive to their LinkedIn profiles • Vodafone introduced a sci-fi game –based program for employees across India where employees who qualified different levels received rewards like recharge coupons, free app downloads etc.
- 19. FRINGE BENEFITS • A payment to a worker in addition to salary or wages. • It may take the form of cash, goods, or services • It may include such items as health insurance, pension plans, and paid vacations. • Some fringe benefits are regarded part of a taxable income • The fringe benefits are classified under four heads as given under: 1. For Employment Security : Includes leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays 2. For Health Protection : Include accident insurance, health insurance, hospitalization, life insurance, medical care, sick leave 3. For Old Age and Retirement : Includes pension, gratuity, provident fund 4. For Personnel Identification, Participation and Stimulation : Includes anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, housing, income tax aid, counseling, safety measures
- 20. MOST USED REWARDS TO MOTIVATE EMPLOYEES: Employee recognition Gift certificates Special events Cash rewards Merchandise incentives E-Mail / Print communications Training programs Work / Life benefits Variable pay Group travel Individual travel Sweepstakes
- 21. IMPROVING PERFORMANCE :HR TOOLS FOR LINE MANAGER • The employee should have a doable goal . • Recognizing employee’s contribution is a powerful motivation tool . • Use social recognition as positive reinforcement on day to day basis .
- 22. Job design • Job design is an important tool to motivate as well as retaining employees. Improving performance :HR as a profit center 1. Financial incentives 2. Non financial incentives
- 23. IMPLICATIONS FOR MANAGERS 1. Ask : does it make sense to use incentives ? 2. Link the incentive with your strategy 3. Design the program to be motivational 4. Don’t forget feedback and recognition . 5. Set complete standards 6. Be scientific
- 24. • Salary Plan • Commission Plan • Combination Plan • Sales Incentives in Action Incentives for Salespeople
- 25. Salary plan Fixed salary Involves prospecting(finding new clients) or account servicing Example- Sales of technical products. Commission Plan Pay is only a percentage of sales. Can increase turnover of salespeople May cause a neglect of non-selling activities.
- 26. Combination Plan • Combination of salary and commissions. • Reduces the salesperson’s downside risk. Sales Incentives In Action • Small base salary with high commission.
- 27. HOW EFFECTIVE ARE YOUR INCENTIVES o Do the salesperson understand the compensation plan? o Do they know how we measure and reward performance? o Are quotas fair? o Does our commission plan maximizes sales of most profitable items? VUE Software
- 28. INCENTIVES FOR MANAGERS AND EXECUTIVES • Executive Total Reward Package • Base salary (cash) • Short-term incentives (bonuses) • Long-term incentives (e.g., stock options) • Sarbanes-Oxley Act of 2002 • Makes executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders. • Requires the CEO and CFO to repay bonuses, incentives, or equity- based compensation received following issuance of a financial statement that the firm must restate.
- 29. SHORT- AND LONG-TERM INCENTIVES • Short-Term Incentives: The Annual Bonus • Plans intended to motivate short-term performance of managers and tied to company profitability. • Issues in awarding bonuses • Eligibility basis • Fund size basis • Individual performance award • Long-term incentives • Stock options • Performance shares • Premium price options • Stock appreciation rights
- 30. TABLE Multiplier Approach to Determining Annual Bonus Company’s Performance (Based on Sales Targets, Weight = 0.50) Individual Performance (Based on Appraisal, Weight = .50) Excellent Good Fair Poor Excellent 1.00 0.90 0.80 0.70 Good 0.80 0.70 0.60 0.50 Fair 0.00 0.00 0.00 0.00 Poor 0.00 0.00 0.00 0.00 Note: To determine the dollar amount of a manager’s award, multiply the maximum possible (target) bonus by the appropriate factor in the matrix.
- 32. • How to design Team Incentives? 1. Engineered Standards 2. Pros and Cons of Team Incentives • Evidence Based HR: That undercut Team Incentives • Profit Sharing Plans • Scanlon Plans 1. Philosophy of Co-operation 2. Identity
- 33. 3. Competence 4. Involvement System 5. Sharing of Benefits Formula • Other Gain Sharing Plans 1. Lincoln Incentive System • At Risk Pay Plans • Employee Stock Ownership Plans and Broad based Stock options • Incentive Plans in Practice: Nucor
- 34. THANK YOU!